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Monday, 9 November 2009

3 Steps to Successful Sales Forecasting

In most businesses this (the 4th) quarter is the busiest and much sales effort is focused on getting the best results from these critical weeks. However good sales managers are also preparing get to grips with next year's sales targets. This is an important activity because the earlier issues are identified the more time there is to adjust strategies to meet them. Whilst it is important to continue to focus on getting the numbers for this year, for sales management it is vital to understand the nature of the challenge for next year. This analysis is as relevant for the owner managed business where the MD is often the sales manager, as the larger organisation where is has a well developed sales function.

Often it takes a month or two to re orientate your sales activity and doing it now (in Q4) gives 12 months to shoot for next year's target rather than maybe 9 or 10 months if left till the first month of the New Year.

Putting together a simple forecast requires one to break projected sales down into 3 areas, Known, Seen and Unseen. So what do these 3 categories mean? What is their significance? Let us look at each one in turn. This forecasting method is really only applicable to B2B sales, retailers have to use a different method which will be the subject of a future article.

Known sales are those which come from your existing accounts, so you can, based on previous years, fairly accurately estimate your income for the coming period, whilst we all know that individual account incomes vary from year to year it should be possible to approximate the likely revenue. This number for most businesses this will represent a large % of the overall target

Seen sales relate to a category of sales which estimates income based on the long term pipeline and an estimate of what percentage of sales tend to come from new business. Typically this would be the total value of the pipeline factored by the likelihood of success.

Unseen sales comprise that proportion of the sales target where you have no indication of where these sales are coming from. These are, t0 paraphrase Donald Rumsfeld, "unknown unknowns" This element represents the risk in your forecast. The larger the percentage of unseen sales, the more risk there is in the forecast.

Once you have these figures it should also direct you where you need to concentrate your sales effort be that new business development or maximising revenue from your base accounts. If you're trying this for the first time don't be too cautious in forecasting revenue, there should always be an element of unseen in the forecast depending on the type of business it can vary between 10-35% as a norm, anything more than that would indicate that the forecast is too optimistic and is unlikely to be achieved.

Forecasts have to support management objectives but if they are too unrealistic the sales force will very quickly find this out and the target will be disregarded and there will be no real attempt to achieve it. Accurate forecasting is nonetheless an important component in managing your business and an important tool in how it will be developed.